The Future of Real Estate in German Insurer Portfolios: Navigating Headwinds
At first glance, everything seems rosy. The real estate allocation of the insurance industry continued to rise last year. Specifically, the real estate quota in the portfolios of German insurers is at 13%—0.9% higher than the previous year and still far from the maximum mark of 25% that insurers are allowed to invest in "Betongold" (concrete gold) measured against the total share of all investment funds.
According to the study, the rising quota has persisted for 14 years. For this, consulting firm EY Real Estate surveyed 32 representative insurance companies in the summer of 2023.
A Shift in Sentiment: Caution Replaces Enthusiasm
However, upon closer inspection, dark clouds loom over the industry sky. Currently, only 14% of the surveyed insurers want to further increase their real estate quota (2022: 50%). A clear majority of 68% now wants to keep their real estate quota stable, while 26% even want to reduce their real estate investments, according to the figures.
This makes it clear: the local insurance industry also feels the current stressors of the real estate segment. Since at least spring 2022—the beginning of Russia's war of aggression against Ukraine—nothing in construction has been like it was in the many boom years before. Interest rates have risen, and construction material prices have climbed above average, primarily due to massively increased energy costs. Above all, steel, bitumen, construction timber, and copper have become temporarily scarce in recent months. Essential materials for house building, in particular, have become more expensive.
The Market Reality: Falling Permits and Developer Insolvencies
As a result, the number of new permits is continuously declining. Additionally, there are the first insolvencies of project developers. A prominent example was the announced exit of major player Gerch from project development a few weeks ago, with a total volume of approx. €4 billion. Residential real estate is also losing operational attractiveness due to these market conditions—an absurdity, given the housing shortage rampant especially in major cities.
Why Insurers Should Not Abandon Real Estate
If now even the first very loyal institutional investors—and insurers are at the forefront—turn their backs on the market, caution is advised. But there are miles of difference between caution and panic. It is good and right that insurers are now proceeding more selectively with their investments in commercial and residential real estate.
But it is also beyond question that properties in good condition and good locations will remain a central asset for insurers. This is supported primarily by looking at the objective economic and demographic facts and developments. The limited supply of new apartments meets strongly increased demand. Driving factors are, first, immigration from global crisis areas.
Second, the trend towards ever-higher square meters per capita. And third, internal migration, which primarily concentrates on metropolitan regions and urban areas. Especially in sought-after regions and cities like Munich, Berlin, Rhine-Main, Stuttgart, Hamburg, Cologne, Münster, southern Upper Rhine, Hanover, and Düsseldorf, demand will exceed supply for years to decades—thus likely providing investors with stable returns.
Beyond Demographics: Untapped Value-Add Potential
But it's not just the simple calculation of rising population numbers and stagnating living space that speaks for real estate investments. There is also hardly any other industry with as much untapped development potential as the construction and housing industry. Energy-efficient renovations, digitalization, and connectivity—there is an enormous amount to catch up on here and thus room for value appreciation. Investment opportunities therefore remain enormously strong.
No one should be permanently unsettled by the current slight trends of turning away. Insurers should continue to cultivate and expand the long-term investment horizon with regard to real estate.
About the Author:
The trained banker and studied real estate economist from Cologne, Florian Bauer, has been active in the financial sector since 2008. In 2018, he founded Bauer Immobilien GmbH. Operationally, the company acts nationwide and primarily targets private capital investors. The goal of the Cologne-based firm is to support and advise its customers in all aspects of purchasing real estate.
Strategic Recommendations for Insurers
- Focus on Quality and Location: In a challenging market, the premium for prime assets in top locations increases. Insurers should prioritize properties with strong fundamentals over speculative developments.
- Embrace Value-Add Strategies: Instead of just buying completed assets, consider investments that allow for value creation through refurbishment, modernization, or rezoning, which can offer higher risk-adjusted returns.
- Diversify Within Real Estate: Look beyond traditional residential and office to sectors like logistics, healthcare real estate, or sustainable "green" buildings, which may offer more resilient cash flows.
- Leverage Long-Term Horizon: Insurers' long-term liability structure is a perfect match for real estate's illiquid, long-duration cash flows, providing a natural hedge against inflation over time.
- Strengthen Due Diligence: In a market with rising developer insolvencies, thorough vetting of partners, contractors, and project feasibility is more critical than ever.
In conclusion, while the real estate investment landscape has undoubtedly become more complex, it remains a cornerstone of a diversified insurer portfolio. The key is not to exit the market but to adapt strategies—becoming more selective, focusing on core strengths, and leveraging the sector's long-term structural drivers to secure stable, inflation-resistant returns for policyholders.